CAMBRIDGE – Consider the followingscenario. After a victory by the left-wing Syriza party, Greece’s new government announces that it wants to renegotiate the terms of its agreement with the International Monetary Fund and the European Union. German Chancellor Angela Merkel sticks to her guns and says that Greece must abide by the existing conditions.

.

Fearing that a financial collapse is imminent, Greek depositors rush for the exit. This time, the European Central Bank refuses to come to the rescue and Greek banks are starved of cash. The Greekgovernment institutes capital controls and is ultimately forced to issue drachmas in order to supply domestic liquidity.

.

With Greece out of the eurozone, all eyes turn to Spain.Germany and others are at first adamant that they will do whatever it takes to prevent a similar bankrun there. The Spanish government announces additional fiscal cuts and structural reforms. Bolstered by funds from the European Stability Mechanism, Spain remains financially afloat for several months.

.But the Spanish economy continues to deteriorate and unemployment heads towards 30%.Violentprotests against Prime Minister Mariano Rajoy’s austerity measureslead him to call for a referendum.

.

His government fails to get the necessary support from voters and resigns, throwing the country into full-blown political chaos. Merkel cuts off further support for Spain, saying that hard-working German taxpayers have already done enough. A Spanish bank run, financial crash, and euro exit follow in short order.

.In a hastily arranged mini-summit, Germany, Finland, Austria, and the Netherlands announce that they will not renounce the euro as their joint currency. This only increases financial pressure on France, Italy, and the other members. As the reality of the partial dissolution of the eurozone sinks in, the financial meltdown spreads from Europe to the United States and Asia.

.

Our scenario continues in China, where the leadership faces a crisis of its own. The economy’s slowdown has already exacerbatedsocial conflict, and recent developments in Europe have added fuel to the fire. With European export orders canceleden masse, Chinese factories are faced with the prospect of massive layoffs. Demonstrations begin in major cities, calling for an end to corruption among party officials. China’s government decides that it cannot risk further strife and announces a package of measures to boost economic growth and prevent layoffs, including direct financial support for exporters and intervention in the currency markets to weaken the renminbi.

.

In the US, President Mitt Romney has just taken office, following a hard-fought campaign in which he derided Barack Obama for being too soft on China’s economic policies.The combination of financial contagion from Europe, which has already led to a severe credit crunch, and a sudden flood of low-priced imports from China leaves the Romney administration in a bind. Against the advice of his economic advisers, he announces across-the-board import duties on Chinese exports. His Tea Party backers, who were critical in mobilizing electoral support for him, urge him to go further and withdraw from the World Trade Organization.

.

Over the nextfew years, the world economy slumps into what future historians will call the Second Great Depression.Unemployment rises to record-high levels.Governments without fiscal resources are left with little option but to respond in ways that will only exacerbate problems for other countries: trade protection and competitive exchange-rate depreciation. As countries sink into economic autarky, repeated global economic summits yield few results beyond empty promises of cooperation.

.

Few countries are spared the economic carnage.Those that do relatively well share threecharacteristics: low levels of public debt, limited dependence on exports or capital flows, and robust democratic institutions. So Brazil and India are relative havens, even though their growth prospects are severely diminished as well.

.

As in the Great Depression, the political consequences are more serious and hold longer-term significance. The eurozone’s collapse (and, for all practical purposes, that of the EU itself) forces a major realignment of European politics. France and Germany compete openly as alternative centers of influence vis-à-vis the smaller European states. Centrist parties pay the price for their support of the European integration project, and are repudiated in the polls by parties of the extreme right or extreme left. Nativist governments begin to kick out immigrants.

.

For nearby countries, Europe no longer shines as a beacon of democracy.The Arab Middle East takes a decisive turn towards authoritarian Islamic states. In Asia, economic strife between the US and China spills over into military conflict, with increasingly frequent naval clashes in the South China Seathreatening to erupt into a full-scale war.

Many years later, Merkel, who has withdrawn from politics and become a recluse, is asked whether she thinks that she should have doneanything differently during the euro crisis. Unfortunately, her answer comes too late to change the course of history.

.

A remote scenario?Perhaps, but not remote enough.

.

Dani Rodrik is a professor at Harvard University’s Kennedy School of Government and a leading scholar of globalization and economic development. His writings are a compelling combination of international and development economics, history, and political economy, and often challenge prevailing orthodoxy about which policies best promote growth. His most recent book is The Globalization Paradox: Democracy and the Future of the World Economy

Greek exit will be an economic and political nightmare
.Lorenzo Bini Smaghi.June 15, 2012

PermalinkExit from the euro by Greece, or by any other
member state, has become a fashionable topic for academics, commentators and
market participants.The analysis is most often conducted on the basis of the
economic costs and benefits, and the possible social and political consequences
of such an exit for Greece and for the rest of the euro area. Most recognise
that, under prevailing circumstances, the costs are too high. Even Alexis Tsipras, leader of Greece’s Syriza party, who wants to renegotiate the terms of the International Monetary
Fund and EU programme, has committed in the FT to keep Greece in the euro.

.

It is generally taken for granted, including by Mr
Tsipras, that Greececanexit the euro if it decided to do so and
adopted a new currency. It is, however, not that simple.

.

First, it would be very difficult for any Greek government to impose on its
citizens the use of a newlegal tender, such as the new drachma.The value of
the new currency would depreciate substantially against the euro and be eroded
by high inflation, given that money creation would be the only way to finance
the budget deficit and to recapitalise the failed banking system. As experienced
in several other Balkan countries, such as Bulgaria or Montenegro, households
and companies would immediately try to protect themselves against currency
debasement by indexing their contracts to the euro, and using the existing
banknotes in circulation as a parallel currency. Of the threemain functions of
money – as a medium of exchange, store of value and unit of account ‑ the new
drachma would most likely perform only the first one, and for only a fraction of
the transactions, while the euro would retain the other two. Greece would have a
de facto euro-based economy..

Second, by exiting the euro Greece would violate the Lisbon treaty.When
adopting the euro Greece committed to a series of obligations, including the
renouncement to its own currency, which is irreversible. The European
Commission, as the guardian of the treaty, or any other of the 26signatories of
the treaty, could sue the Greek government at the European Court of Justice if
they felt that the decision to exit the euro had materially damaged them or any
of their citizens. Citizens of any EU states – in particular creditors whose
contracts were redenominated in the new currency – could sueGreece in their
respective courts, which most likely would defer to the ECJ. Greece could also
be sued in the European Court of Human Rights for violating property rights. Any
judgment issued by the ECJ or the ECHR would have to be taken into consideration
by local courts in EU countries, including Greece. This could give rise to
sanctions by the European authorities in case of non-compliance.

Greece could avoid these sanctions only by
disavowing the authority of the supranational institutions.This would mean that
Greece would exit not only the eurozone but also the European Union as a
whole. There is no exit for the euro without exit from the EU, as explained in a
2009 working paper by Phoebus
Athanassiou, a lawyer at the European Central Bank.

.

The only alternative would be for Greece to negotiate with the other26EU
countries a new treaty, allowing Greece to adopt a new currency.Even assuming
that the other countries were willing to accept entering such a negotiation,
developments in Greece would practically make that impossible.As soon as the
negotiations were made known, or even the intention to hold them, Greek citizens
would immediately begin a run on their banks to withdraw euros and transfer
their accounts abroad.This could not be accommodated by the European authorities. Bank holidays and
capital controls would have to be imposed, preventing Greek citizens from
cashing in their savings and taking them abroad. All loans to Greek residents
would be frozenimmediately, including to the state. The country, therefore,
would not have the means then to pay for basic expenditures, such as pensions,
health care, civil servant wages. Conditions would rapidly become chaotic.If Greece remained democratic, the government would most likely losesupport
from its own citizens for its request to leave the euro.It would then have to
start negotiating with its partners on the terms for staying, rather thanleaving, the euro from a much weaker position...Exiting the euro is an economic and political nightmare and thus practically
unfeasible.The reason is that the eurozone is not only an economic and monetary
union; it is also a political union, albeit imperfect.

Central banks are poised to boost liquidity to counter any negative market
reaction this week to the elections in Greece.

Sure, the Greek vote Sunday, which takes place after Barron's goes
to press, could disrupt markets, especially if opponents of the multinational
bailout form a coalition, or parties fail to broker a deal and there is nogovernment at all.

But the sovereign-debt crisis has progressed so much that Greece is now
little more than a sideshow.The biggest danger Greece represents is contagion.
Its long-term future in the euro zone is doubtful, even if parties that endorse
the country's bailout cobble together an alliance that lets them govern.

However, Greece's tepid commitment to austerity and reform seems destined to end
its membership in the euro club before 2014.The wrong election result for
investors would accelerate capital flight, advancing the end game. Some
companies aren't hanging around: French supermarket giant Carrefour(CA.France) says it is pulling out of Greece. It
won't be the last company to do so.

Whatever happens in Greece will have little bearing on the main
battlefront—the euro-zone banking system. Spain last week accepted a rescue
package worth up to 100 billion euros ($126.5 billion) to recapitalize its
banks, which were sapped by bad loans from a burstreal-estate bubble. The
rescue raises more questions than it answers—not least, where the money will
come from. "The bailout is not a solution," says Alberto Gallo, head of European
credit strategy at Royal Bank of Scotland in London. "It shifts the burden from
the private sector to the public sector." That doesn't sit well with investors,
who are pushing up Spain's borrowing costsalmost daily. The yield on its
10-yearbond rose to 6.838%Friday from 6.536% at the end of last month,
reflecting heightened anxiety that a bailout will be necessary—something Europe
can ill afford.

Italy's destiny seems inextricably linked to that of Spain, although its
problems are mostly political, not economic. The yield on Italian10-year
government bonds hit5.912%Friday. Even German yields rose, with 10-yearbunds
trading Friday at 1.436%, compared with lows of 1.172% just a couple of weeks
ago. That suggests uncertainty about the costs that Germany could incur to prop
up the rest of the euro zone.

Moody's Investors Service and Egan-Jones Ratings last weekdowngraded their
ratings for Spain. Moody's now rates Spainone notch above junk; Egan-Jones
ratedSpain at junk even before its latest move. Without a change in its
economic fortunes, or some sort of intervention, Spain soon could have trouble
accessing capital markets to fund itself.

Spain remains keen to avoid a full-scale bailout with onerous conditions. The
experiences of Greece and Portugal show the benefits don't last long. "The
patience of the market is wearingthin," says Steve Wood, chief market
strategist for North America at Russell Investments. "The half-life of the
policy-response euphoria is getting very short."

In pre-emptive strikes to prevent post-election selloffs, central banks
signaled that they stand ready to calm markets. Amid reports that the G-20 is
mobilizing, the European Central Bank indicated Friday it is prepared to provide
liquidity to banks. A day earlier, the Bank of England said it would offer cheap
funds to U.K. banks, if the money is used to provide loans to consumers
(although it is unclear whether demand is there). Friday, U.K. bank stocks
gained on the news. The U.S.-traded shares of Royal Bank of
Scotland(RBS) rose 9.7%, to $7.83, Lloyds Banking
Group(LYG) climbed4.4%, to $1.92, and Barclays(BCS) advanced4.9%, to $12.70.

.Ultimately, closer fiscal integration and the mutualization of debt—meaning
eurobonds—is needed for the euro zone's long-term viability.That will include a
pan-European banking response, including a guarantee on deposits. "Essentially,
Europe is going to have to make a move toward something like a United States of
Europe," says Russell Investments' Wood. And quickly.

.THE STOXX EUROPE 600 INDEX closedFriday at 244, up0.9% on
the week. Spanish equities gained2.5% following the bank bailout. Nokia's
(NOK) shares plunged almost 18%, and Moody's busted
the Finnish cellphone maker's credit rating to junk status after it announced a
profit warning for the second quarter.

Hopeful

.

Spanish equities jumped, on news of an international bailout for its troubled
banks.

OSLO – Any solution to the eurozone crisis must meet a short-run objective and a long-run goal.Unfortunately, the twotend to conflict.

The short-run objective is to return Greece, Portugal, and other troubled countries to a sustainable debt path (that is, a declining debt/GDP ratio).Austerity has raised debt/GDP ratios, but a debt write-down or bigger bailouts would undermine the long-term goal of minimizing the risk of similar debt crises in the future.

Long-run fiscal rectitude is the only way to accomplish that goal. But it is hard to commit today to practice fiscal rectitudetomorrow. Official debt caps, such as the Maastricht fiscal criteria and the Stability and Growth Pact (SGP), failed because they were unenforceable.

The introduction of Eurobonds – joint, aggregate eurozone liabilities – could be part of the solution, if designed properly.There is certainly demand for them in China and other major emerging countries, which are desperate for an alternative to low-yielding US government securities.

But Germany remains opposed on moral-hazard grounds: a joint guarantee of Eurozone members’ liabilities would strengthen individual national governments’incentive to spend beyond their means. Indeed, this version of Eurobonds would fail, both economically and politically.

But a different version has begun to gain traction in Germany.The German Council of Economic Experts has proposed a European Redemption Fund (ERF). The plan would convert into de facto 25-yearEurobonds the existing sovereign debt of member countries in excess of 60% of GDP, the threshold specified by the Maastricht criteria and the SGP. Steps toward this solution to the short-term debt problem would be paired with implementation of the “fiscal compact,” German Chancellor Angela Merkel’s proposed solution to the long-term problem.

But this seems upside down. To useEurobonds as the mechanism for eliminating the big sovereign-debt overhang jeopardizes the longer-term objective of eliminating moral hazard: it offers absolutionprecisely on the 60%-of-GDP marginwhere countries will have the most trouble resisting temptation.After all, there is little reason to believe that the fiscal compact or proposed “debt brakes” will succeed where the Maastricht criteria and the SGP failed. Rules need a credible enforcement mechanism.

Misplaced hope that the enforcement problem can be solved by enshrining the fiscal compact in member states’ constitutions might be based on a misunderstanding of the US system.To be sure, the US federal government has never bailed out a state, 49 of which (all but Vermont) have laws or constitutional provisions that limit deficit spending. But the main explanation for the absence of US moral hazard is that the right precedent was set in 1841, when the federal government let eightstates and the Territory of Florida default. Eurozone leadersshould have done the same with Greece a yearor two ago.

.Ever since 1841, the market requires that US states running upquestionable levels of debtpay an interest-rate premium to compensate for the default risk.By contrast, Greece and the eurozone’s other heavy borrowers were able to borrow at interest rates that had fallen to virtually the same level as German Bunds. Had the ECB operated from the outset under a rule prohibiting it from accepting SGP-noncompliant countries’ debt as collateral, the entire eurozone sovereign-debt problem might have beenavoided.

Moreover, even the most fiscally dysfunctional US states, like California, do not operate on a scale remotely near that of European national governments.When citizens began in the twentieth century to demand more from their governments – defense, entitlement spending, etc. – the expansion in the US took place at the federal level, where spending today amounts to 24% of GDP, compared to just1.2% of GDP for the European Union budget.

The version of Eurobonds that might work as the missing long-term enforcement mechanism is almost the reverse of the Germans’ ERF proposal: the “blue bonds”proposedtwo years ago by Jacques Delpla and Jakob von Weizsäcker.Under this plan, only debt issued by national authorities below the 60%-of-GDP threshold could receiveeurozone backing and seniority. When a country issued debt above the threshold, the resulting “red bonds” would lose this status.

The point is that the enforcement mechanism would be truly automatic: market interest rates would provide the discipline that bureaucrats in Brussels cannot.If private investors judged that the new debt had been incurred in temporary circumstances genuinely beyond the government’s control (say, a natural disaster), they would not impose a large interest-rate penalty. Otherwise, the risk-premium mechanism would operate on the red bonds, much as it does on US states.

Of course, the eurozone cannot establish a blue-bond regime without first solving the problems of debt overhang and troubled banks.Otherwise, the plan itself would be destabilizing, because almost all countries would immediately be in the red. Many countries, with debt/GDP ratiosalready far in excess of 60%, face high borrowing costs and austerity-deepened recessions as well. Sharing their debt burden up to 60% of GDP would be substantial assistance, but it would not necessarily restore debtsustainability.

Thus, Eurobonds are not a complete solution.In the short term, Greece may well default and leave the euro. Governments and banks in other countries will then have to be insulated from the conflagration through a combination of bailout money and strong policy conditionality.

Creating this fire break between Greece and Europe’s core would have been far easier two yearsago, before debt/GDP ratios and sovereign spreads climbed so high, and before eurozone leaders’ credibility sank so low, or even one year ago.It might or might not work today.

But onething seems clear.German taxpayers, whose longstanding suspicion of profligate Mediterranean euro members has been vindicated, will not be happy when asked to pay still more for the cause of European integration. At a minimum, they will need some credible reason to believe that 20 years of false assurances have come to an end – that this is the last bailout.

The fiscal compact alone cannot provide that reason. The blue-bonds scheme just might.

Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

The mood at the Vatican is apocalyptic.Pope Benedict XVI seems tired, and both unable and unwilling to seize the reins amid fierce infighting and scandal. While Vatican insiders jockey for power and speculate on his successor, Joseph Ratzinger has withdrawn to focus on his still-ambiguous legacy.

Finally, there is clarity.The Holy See has cleared things up and made the document accessible to all: a handout on checking whether apparitions of the Virgin Mary are authentic.Everything will be much easier from now on.The Roman Catholic Church has taken a step forward.This "breaking news" from the Congregation for the Doctrine of the Faith (CDF) reveals the kinds of issues the Vatican is concernedwith -- and the kind of world in which some there live. It's a world in which the official Church investigation of Virgin Mary sightings is carefully regulated while cardinals in the RomanCuria, the Vatican's administrative and judicial apparatus, wield power with absolutely no checks and the pope's private correspondence turns up in the desk drawers of a butler.It's a completely different apparition of the Virgin Mary that has pulled the Vatican and the Catholic Church into a new crisis, whose end and impact can only besurmised: the appearance of a source in the heart of the Church, a conspiracy against the pope and a leak code-named "Maria."Since the end of May, the pope's former butler, Paolo Gabriele, has been detained in a 35-square-meter (377-square-foot) cell at the Vatican, with a window but no TV.Using the code name "Maria," he allegedly smuggled faxes and letters out of the pope's privatequarters. But it remains unclearwho was directing him to do so. Even with Gabriele's arrest, the leak still hasn't been plugged.More documents were released to the public last week, documents intended primarily to damagetwo close associates of Pope BenedictXVI: his private secretary, Georg Gänswein, and Cardinal Secretary of State Tarcisio Bertone, the Vatican's top administrator.

.

According to one document, "hundreds" of other secret documents would be published if Gänswein and Bertone weren't "kicked out of the Vatican." "This is blackmail," says Vatican expertMarco Politi. "It's like threatening total war."

.A House in Disarray

.

.Fear is running rampant in the Curia, where the mood has rarely been this miserable. It's as if someone had poked a stick into a beehive. Men wearing purple robes are rushing around, hecticallymonitoring correspondence. No one trusts anyone anymore, and some even hesitate to communicate by phone.It all began in the accursedseventh year of the papacy of Benedict XVI, with striking parallels to the latter part of Pope John Paul II's papacy. The same complaints about poor leadership and internal divisions are being aired outside the Vatican's walls, while the pope himself seems exhausted and no longer able to exert his power.Joseph Ratzinger turned 85 in April.This makes him the oldest pope in 109 years, and one of the few popes who have exercisedwhat Benedict has called this "enormous" office at such an advanced age.

.Of course, he is still enviably fit, both mentally and physically, especially compared to his predecessor in his later years.But speaking has become unmistakably more difficult for Benedict than at the beginning of his papacy, and it's hard to miss that his movements have become stiff and cautious.He recently told a visitor that his old piano hardly gets any use anymore.Playing it requires practice, he added, but he doesn't have any time for that. He prefers to continue working on the last part of his series on Jesus, which he wants to finish before dying.

A Ship with No Captain

These days, it isn't difficult to find clerics at the Vatican who are willing to talk, provided their identities remain anonymous..The monsignor who finds his way to a restaurant near Piazza Santa Maria in Rome's Trastevere neighborhoodoneevening worked closely with Ratzinger in the CDF for years. But even before the waiter arrives with water and wine, the monsignor delivers his verdict on Ratzinger's papacy: "The pope doesn't fully exercise his office!" In his view, instead of having things under control, they control him. The pope isn't interested in daily affairs at the Vatican, says the anonymous monsignor. Still, this is not exactly unprecedented, as his predecessor also neglected the Curia. While the Polish pope spent a lot of time traveling, his German successor is apparently happiest while poring over books and writing speeches. "He simply isn't taking matters into his own hands," the monsignor says. In essence, he adds, the pope faces a different power in Rome -- and one he hasn't take command of.Although the Vatican is Catholic, it's alsotwo-thirdsItalian. In the end, says the monsignor, the Vatican's employees and administration don't care whoamong their ranks leads the Church. Even for someone who has been living there for decades, the monsignor says, "the Vatican is a ball of wool that's almost impossible to untangle -- not even by a pope." When John Paul II died in April 2005, the Curia was in terrible shape.Events and personnel decisions had been postponed during his last fewyears, in which he was often ill. The new pope was expected to finally clearoff the desks and give the Curia a fresh start.But, for the most part, such reformshaven't materialized.Priests still hold all key positions, including those on the Council for the Laity and the Council for the Family. The only woman in a senior position, Briton Lesley-Anne Knight, was driven out of office as secretary-general of the Catholic development agencyCaritas Internationalis in 2011 for having openly opposed the Church's male-dominated hierarchy.

.

Fractured and Ferocious

..A "reform of the Curia" is probably a contradiction in terms.Its hierarchical, essentially medieval organizational model is incompatible with modern management. The Vatican is an anachronistic, albeit surprisingly tenacious system, in which pecking orders and an absurd penchant for secrecy and intrigue prevail. "The only important thing is proximity to the monarch," says a member of a cardinal's staff. Rome works like an absolutist court, one in which decisions are made by peoplewhispering things into the others' ears rather than by committees. "There are many vain people here, people in sharp competition with one another," the staff memberadds.

.

Who spoke with whom, and for how long?What did they talk about? Who attends early Mass with whom, and who invites whom to dinner? Who's in and who's out? Who belongs and who doesn't, and who's coming into favor and who's falling out of it? "This moodfosters feelings of exclusion, discrimination, envy, revenge and resentment," the monsignor says. And all things have now appeared in the so-called Vatileaks documents..Papal secretary Gänswein, in particular, has made many enemies.As the pope's gatekeeper, he has influence over who is granted or denied the pontiff's favor as well as over which events and issues might command his attention. This power can trigger fear, jealousy and derision in the corridors of the Apostolic Palace, the pope's official residence. For Gänswein, it seemed almost miraculous that he was able to spend an entire evening relaxing and conversing with German clerics at the Vatican's embassy in Berlinlast September. It was an experience he couldn't have had in Rome. .The Vatican is disintegrating into dozens of competing interest groups. In the past, it was the Jesuits, the Benedictines, the Franciscans and other orders that competed for respect and sway within the Vatican court. But their influence has waned, and they have now been replacedprimarily by the so-called "new clerical communities" that bring the large, cheering crowds to Masses celebrated by the pope: the Neocatechumenate, the Legionaries of Christ and the traditionalists of the Society of St. Pius X (SSPX) and the Priestly Fraternity of St. Peter -- not to mention the worldwide "santa mafia" of Opus Dei. They all have their open and clandestine agentsin and around the Vatican, and they all own real estate and run universities, institutes and other educational facilities in Rome. Various cardinals and bishops champion their interests at the Vatican, often without an official or recognizable mandate. At the Vatican, everyone is againsteveryone, and everyone feels they have God on their side..Perhaps Benedict XVI simply knows the Vatican too well to seriously attempt to reform it."As pope, this veteran curial insider has turned out to have virtually zero interest in actually running the Roman Curia," writes John L. Allen, a biographer of the pope.

.Losers in the Battle for Reform

The current scandal unfolded against this backdrop.The revelations about the secret Vatican documents -- dubbed "Vatileaks" by none other than papal spokesman Padre FedericoLombardi -- first emergedmore than four monthsago. They suggest a Vatican mired in corruption and character-assassination campaigns, a plot that seems hardly limited to a butler's alleged act of theft.

.

.The central figure is Archbishop Carlo Maria Viganò, whom the popeinstructed in July 2009 to clean up at the Vatican administration.The overzealous lawyer imposed cutbacks in various areas, including construction contracts, real estate and management of the Vatican Gardens. In a letter to Bertone, he wrote that he had turned a Vatican budget deficit of €7.8 million ($9.8 million) into a surplus of €34.5 millionwithin a year by putting an end to old boys' networks that "always awarded contracts to the same companies" -- at double the pricescustomarily paid outside the Vatican. Viganò made himself unpopular with his fight against waste and abuse of office..He was maneuvered out of his position after only27 months and, since October, he has been the Vatican's ambassador to the United States in Washington, far away from the Vatican. He has perceived his transfer as a punishment. In a letter of protest to the pope, he painted a blunt picture of the Curia: "The realm is fragmented into many small feudal states, with everyone fighting againsteveryone else." The conditions, he wrote, are "disastrous" and, even worse, are "well-known" to theentire Curia..The Vatileaks scandal has also brought to light the reasons behind the sacking of anothersenior official. Ettore GottiTedeschi, head of the Vatican bank until shortly before Pentecost, was apparently shown the door because he was trying to bringmore transparency to the scandal-ridden institution. His goal was to make the bank -- where Mafia godfathers once deposited their money for safekeeping -- eligible for the Organization of Economic Cooperation and Development's (OECD) "white list" of supposedly clean organizations. Tedeschi wanted the Vatican to finally disclose transactions that satisfied international standards on combating money laundering. He failed.Observers believe that the banker's case is the real core of the scandal, a power struggle over control of the Vatican's finances. This most likely explains why Tedeschi was so vigorously ousted. The bank's board of directors issued absurd justifications for his expulsion, saying that Tedeschi, a professor of businessethics, was unpredictable and had drawn attention to himself through his absences..In any case, it's clear that Tedeschi has lost out in a struggle against Bertone. It apparently displeased the pope's second-in-command that new guidelines could make a cut in the Vatican's assets.

An Old Guard Ignored

.It would be overly simplistic to interpret all of this as merely a conflict between reformers and traditionalists. Inreality, it's about the Church's sclerosis, and a problem that has a name: Benedict XVI.The Vatican's old guard, made up of Italian cardinals and their backers, believed that they had found a transitional pope in Ratzinger. But now the transition is in its eighth year, and the Curia is roughly where it was near the end of the previous pope'slife: There's no one in sight to firmly assume the helm...Benedict XVI surrounds himself with individuals he's known for a long time, and he's given themconsiderable power.When he appointed Bertone to his senior office, the pope bypassed the usual pecking order of the cliques. He and Gänswein, known in Rome as the "Black Forest Adonis" on account of his southwestern-German origins, have become too powerful and independent for many cardinals in the Curia. Bertone and Gänswein were the primary targets of the attack code-named "Maria." .Cardinals from Italy's provinces have noticed that their access to the Holy See is slipping away.Although Bertone is Italian, he prefers his fellow members of the Salesian order, elevating them to key positions and nominating them as cardinals. In addition, the 77-year-old Bertone is seen as a poormanager and awkward diplomat. In the summer of 2009, a delegation of cardinals reportedly asked the pope to replace him.But the head of the Vatican administration can hardly be the only target of the "Maria" attacks. The reason for this is that it's highly likely that he would only have remained in office for another six months in any case so as to clear the position for a successor. No, "Maria" is aiming higher than Bertone.

Uncomfortable in Office

The Catholic Church has a leadership problem at the center of its baroque court.The leaked documents ultimately harm Benedicthimself, and the scandal is also fundamentally detrimental to the papacy itself. With each additional day of speculation over the true masterminds behind the plot, there is a growingimpression of a difficult papacy and a weakened pope who is no longer calling the shots.For a long time, Ratzinger himself could hardly believe he was suddenly the leader of all Catholics.More than a month after his election, on May 24, 2005, he paid another visit to the place in the Vatican where so many things had begun for him: the seminary in the Campo Santo Teutonico, a green island in the cramped papal state, directly adjacent to the sacristy of St. Peter's Basilica.He had lived here during the Church's sweeping modernizationeffort known as Vatican II and, in 1982, he returned to Rome from Munich, staying "in a room with only the bare necessities around me so that I could make a fresh start." .Ratzinger remained loyal to the seminary community until he was elected pope.For decades, he celebrated Mass at 7 a.m. there every Thursday, and he often ate with students in the dining room, had discussions with them and attended the Christmas party in the fireplace room. It was a place to which he could seek refuge from his duties as head of the CDF, a kind of adopted family..He hasn't been to the seminary since his last visit, in late May2005, which lasted over an hour.In parting, Ratzinger signed the guestbook. He wrote "Benedict XVI" and then, leaving a small space, scribbled "pope." At first he wrote it with a lower-case p, but then he changed it to an upper-case one.

.None of his predecessors had ever signed anything like that -- and Benedict himself would never do it again.It was almost as if he had to tell himself: My God, I'm the pope!.Ratzinger felt uncomfortable with the power he had assumed, which is one reason he has declined to comprehensively reform the system.He has preferred to place his trust in his underlings.

.A Need for Family

Benedict doesn't need the Vatican; he needs a small family.Family is sacred to him, and it's something he has always sought throughout his life. The only surviving member of his family is his olderbrother, Georg. His father, Joseph, died in 1959 and his mother, Maria, in 1963. His sister, Maria, ran his household for about 30 years, even in Rome, until her death in 1991. When she died, he wrote in his memoirs: "The world became a little emptier for me."For Ratzinger, all of these issues remain unresolved.At the World Meeting of Families held in Milan in early June, he responded to questions about family in an ad hoc and unscripted manner. "Hi, pope," a 7-year-old girl said to him. "I am Cat Tien. I come from Vietnam. I would really like to know something about your family and when you were little like me." The 85-year-old Benedict replied: "To tell the truth, if I try to imagine a little how paradise will be, I think always of the time of my youth, of my childhood. In this context of confidence, of joy and love, we were happy, and I think that paradise must be somethinglike how it was in my youth.".Ratzinger has repeatedly tried to foster this "environment of trust," but it has repeatedly been damaged.When Ratzinger moved into the papal apartments in 2005, he suddenly had to go without a longtime confidante. Ingrid Stampa, the housekeeper who hadsucceeded his sister, was not permitted to join Ratzinger in his new quarters. She had been disgraced in the Vatican for having once pointed at St. Peter'sSquare from the window of the pope's apartment and waved to the crowd -- an unforgivable faux pas..

Instead, fourlay sisters with the Memores Domini association -- Loredana, Cristina, Manuela and Carmela -- became his new housekeepers. They looked after him for five years, attended his prayers every morning, celebrated Christmas and saints' days with him, and ate their meals with him..Then one of them, Manuela Camagni, was killed in a traffic accident in 2010.The pope was shaken. He knelt before her coffin, delivered a eulogy and spoke of the "unforgettable family-likemoments" he had enjoyed with her..With the betrayal of his butler, who had been at his side around the clock, the small world of Joseph Ratzinger has once again been thrown out of joint.

.The Elusive 'Benedict Effect'

When compared with expectations, the results of Benedict XVI'sseven years as pope have been rather modest.The German pope will not be remembered much for his avowed fight to preserve the unity of the Church. Instead, he will be remembered as a victim of circumstances and of fragmented, competing factions, as a pontiff plagued by scandals, mistakes and gaffes. He even built walls backup that seemed to have been worn down long ago. His papacy has consisted of years of ongoing apologies and alleged or actual misunderstandings..He has annoyed the Protestants by declaring that denominations other than his own are not true churches.He has alienated Muslims with an inept speech in the Bavarian city of Regensburg. And he has insulted Jews by reinserting a prayer for the conversion of the Jews into the Good Friday liturgy..He has alsosnubbed the Church by currying favor with the traditionalists of the Society of St. Pius X, which rejects the Vatican II reforms.The current backlog of Church reforms, which had already started piling up under his conservative predecessor, John Paul II, has only gotten bigger under Benedict. The Catholics' Day held in May in the southwestern German city of Mannheim, with its 80,000attendees, was a last cry for change in the Church..The fact that the pope is German has not had a lasting effect on Germans.When he was newly elected, the German media spoke of a "Benedict effect," of how having a German pope would positively influence conversion and retention rates in Germany. But, if it ever really existed, this effect quickly dissipated. Since Benedict's election in 2005, the number of people leaving the Catholic Church in Germany has more than doubled, and it's been the highest most recently in Ratzinger's former Archdiocese of Munich and Freising. Only 30 percent of Germans are still Catholic today..The claim, often made by enthusiastic Catholics on German talk shows -- that all of this is a German or European problem and nothing but sour grapes, and that the Church is more successful elsewhere -- isn't even true in deeply Catholic Latin America, where the number of Catholics has been sharply declining. Evangelical Christians, on the other hand, are multiplying there like the loaves and fishes in Canaan.

.Stymied by Vatican Insiders

..

Ratzinger has only been able to make it through those seven years by making sure he has small escapes. In addition to his everyday duties, he has written books and encyclicals on Christian love ("Deus Caritas Est") and on hope ("Spe Salvi").

.Some of his writings have become best-sellers, even in hopelessly secularized Germany.Indeed, this pope has managed to put the Vatican back on the secularworld's radar. His encyclicals, his thoughts on reason and faith, and his criticism of the relativism of all values have been closely followed in the press. He has been seen as a pope who understands the zeitgeist..In fact, the pope's failure to live up to many expectations has actually often benefited the Church."Christianity, Catholicism, is not a collection of prohibitions; it's a positive option," Benedict said before his trip to Bavaria in 2006. Although he stands behind dogma and pure doctrine, he tries not to alienateanyone, even if he admittedly hasn't always been successful at it. By now, the pope seems about as mild as the Queen of England during his appearances. He knowshow to captivate a crowd without spectacular gestures. He has met with Holocaust survivors in Auschwitz, abuse victims in the United States and people with AIDS in Cameroon..Benedict has understood better than others what the Church's real condition is -- and how farremoved it is from his ideal.His stumbling block has always been the Curia. Perhaps the real thing learned over the lastseven years is just how powerlessness a pope can be.

Already Searching for a Successor

The pope only wanted to be a "simple, humble worker in the vineyard of the Lord," a "servant of the truth."Now he stands before the reality of his own mortality. For some time, he has been overcome by periods of "deep sadness," says a source close to Benedict, though he notes that it is unclear whether this is merely sadness or genuine depression..Ratzinger survived twomild strokes in the early 1990s.Both his father and sister died of strokes. The pope takes aspirin as a preventive medicine. He is plagued by osteoarthritis in his knees, especially the right one. Walking is getting more difficult for him, and he now uses a rolling platform, which he mounts upon entering St. Peter's Basilica, such as when he is wearing heavy garments..He hasn't gone on vacation in the mountains since 2010.Sometimes he takes short walks with his secretary in the Vatican Gardens, where he says the rosary..In the Curia and the backrooms of the Vatican's palaces, efforts are already underway to search for a successor. The possible outcomes of a conclave are analyzed and candidates are discussed, as was doneseven years ago. Some say the next pope should be someone like Pius XII, the pope between 1939 and 1958 who was a calculating and predictable power player and Vatican insider. Or someone likePaul VI, the pope from 1963 to 1978, who paid attention to the Curia's interests. The name of Cardinal Angelo Scola, the archbishop of Milan, has been mentioned, as has that of Leonardo Sandri, an Argentine cardinal with Italian roots. Another possible candidate is Curia Cardinal Gianfranco Ravasi, president of the Pontifical Council for Culture and one of the few Vatican insiders who is adept at handling the media, politics and the public..The Italians, with 30votes, still form the largest bloc in a conclave. Some believe that, after more than33 years of foreign dominance -- first by a Pole and then by a German -- it's high time to elect an Italian pope. After all, proponents of the idea argue, an Italian cardinal knows the Roman Curia best. But the Italians' prospects have become slim since Vatileaks, says Vatican expert Marco Politi. "If the scandal has exposed one thing, it is the typical Italian mess. Italians are no longer seen as papabile (capable of becomingpope). They have discredited themselves with their power struggle."

Last Days and Legacies

Benedict himself knows that he doesn't have much time left. "The last segment of my life is now beginning," he told birthday guests in April.In fact, his planning hardly goes past next July, when he will attend the Catholic "World Youth Day" in Rio de Janeiro.Healing therift with the SSPX will be at the top of his agenda in the coming weeks, in addition to admonishing feuding groups to exercise mutual respect. .With the dispute that has erupted over the assessment of the reforms of Vatican II, which began50 years, the pope is now experiencing a return to his own past. Will the once liberal-minded and now conservative pastor find the strength to foster reconciliation at the end of his life? To blaze some middle path between tradition and modernity for the world's 1.2 billionCatholics?."Stalin was right in saying that the pope has no divisions and cannot issue commands," Benedict said in the 2010 book-length interview "Light of the World." "Nor does he have a big business in which all the faithful of the Church are his employees or his subordinates. In that respect, the pope is, on the one hand, a completely powerless man. On the other hand, he bears a great responsibility.".Benedict has always seen himself as a teaching rather than a governing pontiff. The professor-pope from the small Bavarian village of Marktl am Inn will undoubtedly not go down in the annals of Church history as Benedict the Great.But he will be remembered as a church leader with a human face, as someone who has remained true to himself as a theologian, and as someone who turned his back on the power within his own four walls.In other words, as a pope with a lower-case p.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.